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What is an Annuity?

  1/18/23 9:49 AM

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An annuity is a type of financial product that is typically used for retirement planning. In the context of life insurance, an annuity is a contract between an individual and an insurance company, in which the insurer agrees to make periodic payments as annuities to the individual, either immediately or at some point in the future. This is in return for a lump sum payment or a series of instalments by the individual.

How do Annuities Work?

There are several types of annuities that are used in life insurance, including:

  • Immediate annuities: In these annuities, pay-out begins immediately after the contract is signed and you are required to pay lumpsum amount to the insurance company.
  • Deferred annuities: In these annuities, the payments do not begin until a future date. The individual is allowed to make contributions to the contract over time, and, as specified in the contract.

► Accumulation phase- This phase begins from the date when you first time pay the premium and begin investing and accumulating cash.

► Vesting phase- This is the phase where you start getting pension as the policy benefit.

  • Variable annuities: Under variable annuities, the value of the contract can fluctuate based on the performance of the underlying investments. The individuals have the flexibility choose how their contributions are invested.. In these annuities, the premiums are usually invested in instruments such as mutual funds or equities.
  • Fixed annuities: As the name suggests, the payouts in these annuities remain constant over the entire period of time. These annuities provide a guaranteed rate of return on the individual's contributions, regardless of how the investments perform.

Annuities can be a useful tool for individuals who are looking to secure a steady stream of income in retirement. However, it is important to carefully consider the terms of the contract, as well as the financial stability of the insurance company, before purchasing an annuity.

Who Should Buy Annuities?

Annuities are a financial product that provide a steady stream of income, typically after you have retired or stopped earning a regular income. To receive these payouts, you must first make a series of premiums, which can be paid in lump sum or through monthly instalments. It is generally recommended to purchase annuities at a younger age, as this allows for the potential for value leverage and the ability to weather negative impacts or make changes if necessary.

 

Siddhant Dubey - Writer & Photographer

Siddhant works as a freelance content writer who is interested in a wide range of spheres from photography and personal finance to cooking. He is also an aspiring photographer striving to showcase life around him through his vision. 

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